perspectivas de mercado de iShares. Este mes, Russ Koesterich, Responsable de Estrategias de Inversión Global de iShares, centra su análisis en el impacto que tiene en los mercados una población envejecida.
Not So Golden YearsHow an Aging Society Can Impact the Markets iShares Market Perspectives | June 2012
iSHARES MARKET PERSPECTIVES  Demographics exert a significant influence on bothExecutive Summary economies and financial markets, an impact that will grow in the coming years. The graying of the developed world is hitting an inflection point and is forecast to accelerate. While we don’t necessarily envision some of the more dire predictions—an aging society does not necessarily lead to generational war—an unprecedented shift in demographics is likely to impact everything from economic growth to equity multiples. Absent significant changes in immigration policy or retirement age, most developed countries will see slower growth in the labor force as more people retire. All else equal, slower growth in the working age population—and in some cases actual shrinkage in the work force—should translate into modestly slower economic growth. From an investment standpoint, there are at least three implications: 1. Historically, slower growth and less demand for capital have been associated with lower real interest rates, suggesting that an eventual rise in real rates may be more tempered than many analysts expect. 2. Equity multiples in developed countries are likely to remain low relative to their historical averages, suggesting that further gains will need to be predicated on Russ Koesterich, earnings growth rather than higher multiples. Managing Director, 3. Slower growth countries are likely to trade at lower valuations versus faster growing iShares Chief Investment Strategist economies, suggesting that the historical premium that developed markets have enjoyed relative to emerging markets is likely to compress over time. All of the above implies that in an aging world growth is likely to command a premium. Among the developed countries, US demographics appear better than virtually any other developed country. However, they are still generally much worse than emerging markets. To the extent that demographics drive growth, investors can consider equities in Brazil, Mexico, India, Indonesia and the Philippines. At the same time, we believe investors should avoid Japan at all costs.
iSHARES MARKET PERSPECTIVES Do Not Go Gentle Into That Good Night proportion of retirees to working age adults will rise to roughly 35%, and in the process put an enormous strain on the economyI don’t want to achieve immortality through my work. I want to and government finances.achieve it through not dying.—Woody Allen In other parts of the world, the aging will be even more acute. In Europe, by 2025 the median age will have risen to over 45. WorstDeath is not only predictable in the individual sense, but also in of all will be Japan. By 2025, the median age of a Japanese citizenthe aggregate. Demographic predictions are usually an exception will be 50. Ironically, although Japan will clearly be the oldestto the rule that long-term forecasts should be treated with country, the nation that is graying the fastest is an emerginghealthy skepticism. Birthrates and mortality tables provide a market, China. Looking at the change in the median age betweensurprisingly accurate view of what a population will look like in 10, 2000 and 2050, China will age faster than any other large country20, or 30 years. As a result, on this topic we know one thing with (see Figure 2).about as high a degree of precision as is possible in the socialsciences: over the next several decades, most of the developed Work Till You Dropworld and China will age at an unprecedented rate. While all the societal implications of the aging of the world’sIn considering the magnitude of the change, it is important to note population are unclear, there is almost certain to be a significantthat this trend has been in place for a long time. In 1900, life economic impact. To start, aging populations will put anexpectancy at birth was 47, the median age was 22.9 and only 4.1% enormous strain on government resources, as the number ofof Americans were over 65.1Today, 15% of Americans are over 65. individuals receiving pensions and state-supported healthcare surges. As mentioned above, the problem is particularly acute inWhile the trend toward an older population has been in place for the United States. The unfunded nature of the US entitlementdecades, the pace is set to increase. Thanks to a relatively high system and the aging of its population will intersect to put anbirthrate and immigration, the trend will be somewhat gentler in existential strain on the US pension and federally fundedthe United States. That said, even in the United States, the healthcare systems.proportion of elderly will rise to unprecedented levels. In theUnited States, the median age will rise from 35.5 in 2000 to US demographics are by no means the worst in the world, but innearly 40 by 2025. many ways the United States is uniquely unprepared. To start, the United States spends more money—both per capita andThe increase in median age in the United States is relatively as a percentage of GDP—on healthcare than any other countrymodest, but the economic impact of an aging population is still in the world. Furthermore, pension and healthcare systems werelikely to be severe given the precarious state of US entitlement designed at a time when the demographic ratios were farprograms. Today, there are roughly five working age Americans different. At the time Social Security was enacted, there wereper retiree. Over the next decade that ratio will slip to 4-to-1 and approximately 25 workers per retiree. Today, the number isby 2030 will fall to nearly 3-to-1 (see Figure 1). In other words, the closer to three.Figure 1: United States Actual and Projected Dependency Ratio Figure 2: The Advancing Median Age 50% Country/area 2000 2025 2050 Change 2000/2050 40% World 26.5 32 36.2 9.7% 30% United States 35.5 39.3 40.7 5.2% 20% China 30 39 43.8 13.8% 10% Europe 37.7 45.4 49.5 11.8% 0% Japan 41.2 50 53.1 11.9% ‘85 ‘95 ‘05 ‘10 ‘15 ‘20 ‘25 ‘30 ‘40 ‘60 ‘80Source: Bloomberg, as of 3/31/12. Source: The Coming Generational Storm, United Nations World Population Aging 1950-20501. Kotlikoff, Laurence and Scott Burns, The Coming Generational Storm (MIT Press, 2004) 2.
iSHARES MARKET PERSPECTIVES  In addition to fewer workers, Americans are both retiring earlier any other economy. 2 So while Australia faces a similar demo- and living much longer than previous generations. The combina- graphic problem, it is arguably much better prepared for these tion of these trends—an aging population, earlier retirement and changes than the United States. longer life expectancy—implies that the US programs are particularly vulnerable, even when compared to other developed Fewer Workers, Slower Growth countries. For example, without a change to current laws, federal spending on Medicare and Medicaid combined will grow from In the May unemployment report, investors were understand bly a roughly 5% of GDP today to almost 10% by 2035 (see Figure 3). frustrated by the deceleration in net job formation. Another part If left unchecked, Social Security and Medicare—along with of that report, which received less attention but may be of more interest on the debt—will eventually crowd out all other govern- significance over the long term, was the labor force participation ment spending. rate, which, despite a slight uptick in May, is close to its lowest rate since 1981 (see Figure 4). Interestingly, this same situation does not hold for all developed countries. For example, Australian demographics are likely to The drop in the participation rate appears to have accelerated be worse than the United States, but given the nature of the since the financial crisis as frustrated job seekers eventually give country’s pension system the Australians are not facing any up and leave the labor force. However, while the trend has large unfunded liabilities. accelerated, its origins go back more than a decade. In Australia, the country has revamped its retirement system so Labor force participation peaked in the United States in 1998 at as to minimize the unfunded liability through what is known as 67.2%. Since then, it has fallen by approximately 3.7 percentage the superannuation retirement system. Employers are required points, recently hitting the lowest level since the early 1980s by law to pay an additional amount of employees’ salaries and when women were first entering the labor force in large numbers. wages (currently 9%) into a fund. Funds can be accessed when an This drop in the participation rate has coincided with a general employee meets conditions of release. After a decade of compul- slowdown in US growth. At the time participation peaked in the sory contributions, Australian workers have more than US$1.2 mid-to-late-1990s, the United States was growing at an average trillion, more money invested in managed funds per capita than annual rate of 4.3% (average growth from 1996 to 2000). Since 2000, US real GDP has averaged roughly 1.7% annualized. Slower US growth can be attributed to a number of factors, not Figure 3: Growth of Federal Spending the least of which are the side effects of the bursting of two bubbles, first in stocks and then real estate. However, it is hard to 40 Actual Projected argue that the decline in labor force participation has not 35 exacerbated the slowdown in growth. Over the long term, a Percentage of GDP 30 25 20 15 10 Figure 4: United States Labor Force Participation 5 (1948 to Present) 0 2000 2005 2010 2015 2020 2025 2030 2035 68% Labor Force Participation Rate 66% 40 Actual Projected 35 64%Percentage of GDP 30 25 62% 20 60% 15 10 58% 5 0 56% ‘62 ‘72 ‘82 ‘92 ‘02 ‘12 ‘22 ‘32 ‘42 ‘52 ‘62 ‘72 2/48 2/58 2/68 2/78 2/98 2/08 Revenues Social Security Medicare & Other Federal Medicaid Noninterest Spending Source: Bloomberg, as of 3/31/12. Source: Congressional Budget Office. 2. Wikipedia, (accessed October 20, 2011).
iSHARES MARKET PERSPECTIVES  country’s secular growth rate is a function of the growth in the be some modest lowering of the long-term secular growth rate for work force plus the growth in productivity. the United States—and many other developed countries. The relationship between economic growth and changes in the Real Yields, Low for Long? participation rate has been evident for most of the post-World War II period. Historically, annual changes in the labor force have A modestly lower secular growth rate has many implications. One, had a strong relationship—they explain roughly 25% of the which seems to go hand in hand with slower growth, is lower real annual variation in growth—with changes in real GDP (see Figure yields. Historically, both in the United States and in other devel- 5). To the extent labor force participation continues to decline, oped countries, the slower growth associated with an aging growth in the United States is likely to face a modest headwind. population and less participation in the workforce has been accompanied by lower real yields. We can get a glimpse of what may be in store for the United States by looking at Japan, where in a somewhat frightening parallel, economic growth has averaged 0.9% annually over the past two decades, and just 0.7% in the 2001 to 2010 period. Obviously, this trend has coincided with a number of “To the extent labor force partic- factors, but it has almost certainly been influenced by the rapid aging in Japan. ipation continues to decline, growth in the United States is likely to face In the case of Japan, this trend is likely to get even worse. While per capita growth may stay the same at around 1% to 1.5%, a modest headwind.” Japan’s population will shrink at an even faster rate in the future. With the productive population declining by 1.1% annually, versus just 0.6% during the 2000s, this suggests future overall In the United States, nominal rates have been falling for three trend growth will be just 0% to 0.5%. 3 decades, a period that has coincided with a gradual aging of the population. Accordingly, there has been a strong correlation To the extent that a higher proportion of older Americans results between demographics and interest rates. As the population has in diminishing participation in the labor force, the United States aged, rates have dropped (see Figure 6). may face a similar although less severe headwind. US demo- graphics look much better than Japan’s, but the basic relation- There was another important trend going on throughout this ship holds. If an aging population implies fewer workers there will period: a secular decline in inflation. Arguably, that has been a much more powerful driver of the drop in yields than any change to the country’s demographics. Figure 5: Labor Force Participation and Economic Growth (1948 to Present) 10% Figure 6: US Nominal 10-Year Yields and Demographics 8% (1981 to 2011) 6%US Real GDP 10-Year Treasury Yield - Core CPI 10% 4% 2% 8% 0% 6% -2% 4% -4% –1.5 –1.0 –0.5 0 0.5 1.0 1.5 2.0 2.5 2% Annual Change in Labor Participation Rate (%) 0% Source: Bloomberg, as of 3/31/12. 0.50 0.55 0.60 0.65 0.70 US Ratio Over 65 yrs. Old/Under 15 yr.s Old 3. Bank of Japan Monetary Affairs Department, The Effects of Demographic Changes on Source: Bloomberg, as of 3/31/12. Past performance is no guarantee of future results. the Real Interest Rate in Japan, Daisuke Ikeda and Masashi Saito, February 2012.
iSHARES MARKET PERSPECTIVES  However, even when you control for inflation, the basic relation- real rates are likely to rise over the long term, the findings from ship between demographics and interest rates remains excep- the BOJ and ECB—coupled with what appears to be a similar tionally strong. Looking at real, or inflation-adjusted, yields dynamic witnessed in the United States—suggest that the produces a similar result. Even after accounting for the impact of backup in yield may be more modest than predicted by models falling inflation, changes in demographics explain more than 65% that ignore demographics. of the variation in yields (see Figure 7). Anyone Want to Buy a Stock? Aging may impact real yields through a variety of mechanisms. As previously demonstrated, as a population ages and work force Just as over the long term a country’s growth rate is driven by participation drops, economic growth tends to slow. All else growth in the work force and productivity, over the long term equal, slower growth tends to be associated with lower real rates. corporate profits are driven by real economic growth. Margins can An aging population is also likely to be associated with less expand or contract for prolonged periods, but over the very long demand for capital, which should also exert a modest downward term they have generally tended to mean revert, leaving revenue pressure on real rates. growth as the chief driver of aggregate corporate earnings. While accessing faster growing emerging markets may provide a This latter explanation appears to extend to other countries. tailwind for revenue, for companies with revenues that are Research into Japanese interest rates by the Bank of Japan dependent on US consumption, earnings growth will ultimately (BOJ) also suggests that an aging population will exert a signifi- be a function of overall US economic growth. cant impact on interest rates. The model by the BOJ predicts that a decline in workers-to-total population ratio lowers the All else equal, slower economic growth suggests that revenues from real interest rate and concludes that demographic changes domestic operations are likely to grow slower than in the past (see impact the equilibrium, or natural, real interest rate through Figure 8). As the accompanying chart illustrates, over the past 50 less demand for capital. 4 years economic growth has been the principal driver of US corporate profitability, explaining more than 35% of the variation in profits. This theory is also supported by a similar study by the European Central Bank (ECB), which found that demographic changes Slower growth caused by an aging population may have a contribute over time to a decline in the equilibrium interest secondary, but perhaps even more pernicious, impact on equities: rate, although the impact is slow and not visible over shorter it may lower multiples. In a 2010 paper, Tim Bond of Barclays time frames. 5 Capital argued that demographics tend to drive equity multiples based on the notion that as investors age demand for equities We have argued in previous pieces that real rates in the United falls, thus lowering the amount investors are willing to pay for a States look too low, especially after taking into account the dollar of earnings. Mr. Bond predicts that forward projections country’s deteriorating fiscal picture. While we still believe that suggest that US P/E should fall to around 11x by around 2015 before recovering slightly to 12x by 2020. 6 Figure 7: US Real 10-Year Yields and Demographics (1981 to 2011) Figure 8: US GDP vs. Corporate Profits (1954 to Present)10-Year Treasury Yield - Core CPI 10% 40% 8% US Corporate Proﬁts QoQ 20% 6% 4% 0% 2% -20% 0% 0.50 0.55 0.60 0.65 0.70 -40% US Ratio Over 65 yrs. Old/Under 15 yr.s Old –15% –10% –5% 0% 5% 10% 15% 20% Source: Bloomberg, as of 3/31/12. Past performance is no guarantee of future results. US Real GDP QoQ 4. Ibid. Source: Bloomberg, as of 3/31/12. 5. European Central Bank Working Paper Series, Interest Rate Effects of Demographic Changes in A New-Keynesian Life-Cycle Framework, No. 1273/December 1970. 6. Barclays Capital, Equity Gilt Study, 2010.
iSHARES MARKET PERSPECTIVES To the extent that aging populations in developed countries do Age vs. Youthindeed post modestly lower growth rates, there is a secondreason we may experience lower multiples going forward. Our Given all of this, what countries are likely to enjoy the mostown research demonstrates that growth rates, both relative to favorable demographics and which ones look the mostother countries and relative to a country’s own history, impact dangerous? Not surprisingly, emerging markets tend to havevaluations. Historically, countries that grow faster have com- younger populations. In particular, most of Latin America andmanded higher multiples, while slower growing countries Asia look particularly good from a demographic standpoint (seetypically trade at a discount (see Figure 9). Figure 10). Both Brazil and Mexico have favorable demographics, with the percentage of the population under 15 3.50 and 3.80As the above figure illustrates, there is roughly a 0.50 correlation times that of the percentage over 65, respectively. However, forbetween growth rates and multiples. While this average holds for investors looking for the best demographics in the largerboth developed and emerging market countries, it is instructive to emerging markets, it is hard to beat Asia. In Indonesia, the undernote that for certain fast growing emerging markets the relation- 15 set outnumbers those over 65 by more than 4-to-1, in Indiaship can be much stronger. For example, China’s and India’s the ratio is nearly 5-to-1 and in the Philippines it is ancorrelations are much higher at 0.80 and 0.72, respectively. The astounding 7.5-to-1.lesson being, for countries perceived as growth stories, growth isboth more rewarded and more penalized. The notable exception among emerging markets is China. While China’s demographics look favorable compared to Japan,The relationship between growth and multiples has two implica- Europe and even the United States, the Chinese population istions for investors. First, while equities still appear reasonably set to age much faster than several of its emerging marketpriced and probably cheap relative to bonds, equity returns may competitors, most notably India, Brazil and Indonesia.be more muted to the extent that multiples do not fully revertback to their long-term average. Under this scenario, investors China’s demographics can be blamed on several factors, startingwill have to rely on earnings growth and dividends, rather than with the country’s notorious one-child policy. As a result of thisrising multiples, to drive future returns. policy, China’s fertility rate is a relatively low 1.58, below some developed markets including the United States. In parts ofSecond, in a world in which developed markets slow, we would China, the birthrate is even lower. Shanghai reported a fertilitysuggest that their multiples are likely to fall relative to emerging rate of just 0.60% in 2010, perhaps the lowest in the world. Asmarkets, with slower growth countries suffering the worst. This a result, over the next few decades, the median age will risesuggests that the traditional premium that developed markets sharply in China to 48.7 by 2050; meanwhile, the populationhave commanded versus emerging markets—historically about will fall slightly from 1.34 billion in 2010 to just under 1.3035%—is likely to contract over time. billion in 2050. 7 While China’s demographics look poor compared to the other emerging markets, Europe and Japan look awful compared toFigure 9: Time Series Correlation Between GDP Forecasts and Current everyone. Japan in particular stands out as a demographicMSCI Country Index P/B(2007 to Present) nightmare. A combination of low fertility rates, no immigration 0.8 and rising longevity make Japan an outlier, even when compared 0.6 with the rest of the developed world. The percentage of Japanese over 65 is already more than 25%, the highest in 0.4 the world. While in the Philippines the young outnumber the 0.2 old by 7.5-to-1, in Japan the old outnumber the young by more 0.0 than 2-to-1. –0.2 Australia Austria Belgium Brazil Canada Chile China Colombia Czech Republic Denmark Finland France Germany Hong Kong Hungary India Indonesia Israel Italy Japan Korea Malaysia Mexico Netherlands New Zealand Norway Philippines Poland Russia Singapore South Africa Spain Sweden Switzerland Taiwan Thailand Turkey United Kingdom United StatesSource: Bloomberg, as of 3/31/12. Correlation measures the statistical relationshipbetween two events. 7. “China’s Achilles heel,” The Economist, April 21, 2012.
iSHARES MARKET PERSPECTIVES Conclusion Figure 10: Global DemographicsThe inevitability of gradualness cannot fail to be appreciated. Ratio Percent Percent—Sidney Webb Country/Region Under 15/ Under 15 Years Under 65 Years Over 65Demographics are like genetics; it would be a gross exaggeration World 25.70% 8.30% 3.10to suggest that they are all that matters, but they will exert asubtle but persistent influence on a country’s economic well- Americasbeing. Given the long-term nature of demographic trends, it is United States 20.10% 14.10% 1.43worth taking note. Brazil 25.40% 7.30% 3.48For investors, there are several implications. In the absence of a Mexico 27% 7.10% 3.80productivity surge—or the even more unlikely possibility of amajor change in immigration policy—trend growth in developed Argentina 24.90% 11.40% 2.18countries is likely to slow. This effect should be more pronouncedin Europe and Japan than in the United States. Instead, the Canada 15.50% 17.30% 0.90principal risk for the United States revolves around government Europespending. Without significant reform, the strain on entitlementspending in the United States is likely to be greater than in other Eurozone 15.76% 17.48% 0.90developed countries due to the persistent failure to tackleunfunded liabilities. Germany 13% 21.10% 0.62 France 18.40% 18% 1.02The second likely effect revolves around interest rates. While realrates should rise in the coming years, the rise may be slower and United Kingdom 17.30% 17.50% 0.99gentler than some expect as demand for capital slows. Third, Italy 13.80% 21% 0.66equity multiples may not revert back to their long-term average inmany developed countries. This also suggests that the historical Asia/Pacificdiscount between emerging market and developed market stocksis likely to narrow over time. China 17.10% 9.60% 1.78 India 28.50% 5.80% 4.91Investors looking to mitigate or avoid the impact of agingpopulations should consider raising their allocation to younger Indonesia 26.10% 6.40% 4.08emerging markets—particularly India, Brazil, Indonesia, Mexico Japan 12.50% 25.40% 0.49and the Philippines—and to companies that generate a growingpercentage of their sales from these regions. Finally, if there were Philipines 33.70% 4.50% 7.49not enough reasons already, investors should probably avoidlong-term positions in Japanese stocks. Source Bloomberg 3/31/12